Manchester United are trying to salvage a deal for the Brazilian Under-21 international Douglas Costa but face competition from Chelsea as they try to persuade his club, Gremio, to lower their valuation of the midfielder.

United are willing to pay an initial fee of £8m for the 18-year-old including various add-ons depending on his success at Old Trafford, but the deal looked to have faltered when Gremio opened talks by demanding £21m. The Premier League champions have made it clear they consider that to be exorbitant but, after several weeks of negotiations, Gremio have now relaxed their stance and the two clubs are attempting to reach a compromise for the latest player to be tagged in Brazil as "the new Ronaldinho".

An already complex series of negotiations has been further complicated by Chelsea's interest while Real Madrid have also been asked to be kept informed and Villarreal have submitted a bid of £6m plus add-ons. Manchester City had also shown tentative interest but have not followed that up with anything more substantial.

The picture is expected to become clearer next weekend when the influential deal-maker Chris Nathaniel travels to Brazil to try to clarify with Gremio exactly what they will accept before reporting back to the player's admirers. United are considered to be in the most prominent position, with the player favouring a move to England, but Chelsea's interest is genuine and it could become a matter of which club is willing to pay the most.

For a deal to Old Trafford to materialise, Gremio will have to accept that United will not pay what they consider to be over the odds for a player who has only just broken into his club's first team. David Gill, United's chief executive, has already informed Gremio that a deal is impossible at the current price. Chelsea, similarly, are not interested unless the players valuation is slashed to a more realistic mark.